National Rental Affordability Scheme - Information for banks and financial institutions

Tenants interested in renting a dwelling should contact a tenancy manager with properties in their desired location.

About the Scheme

The National Rental Affordability Scheme (NRAS) is a long term commitment by the Australian Government to investors prepared to build affordable rental housing.

NRAS seeks to address the shortage of affordable rental housing by offering tax-free financial incentives to the business sector and not for profit housing providers to build and rent affordable dwellings. Through the provision of the tax incentive, NRAS will:

  • increase the supply of new affordable rental housing;
  • reduce rental costs for low and moderate income households; and
  • encourage large scale investment and innovative management of affordable housing.

The incentive, payable either as a grant or refundable tax offset, is paid annually for up to 10 years. The investor must rent eligible dwellings to low and moderate income households at a rate that is at least 20 per cent below prevailing market rates.

The Australian Government  is committed to stimulating the construction of 50,000 high quality homes and apartments. Up to 35,000 new dwellings will be supported in the years up to 2014-15, with a further 15,000 dwellings to be supported beyond 2014-15.

NRAS is not a public housing program; it is a tax incentive to induce more private investment in the lower price range of the residential construction market.

NRAS tenants are typically key workers such as childcare workers, nurses, police officers, fire-fighters and paramedics. In addition to their salary or wages, many NRAS tenants may be eligible for Commonwealth Rent Assistance, a fortnightly payment that assists with rent costs.

It is estimated that 1.5 million Australian households are currently eligible to rent NRAS properties, ensuring a strong ongoing demand for NRAS properties and a large pool for investors to choose from.

A new asset class

NRAS is a new opportunity for government, debt and equity investors, property developers and not for profit housing providers to work together to increase the supply of affordable private rental housing and create a new ongoing asset class in Australia.

It recognises that governments have a role in creating and encouraging new markets. The Australian Government has made a 10 year financial commitment to NRAS. NRAS has bipartisan support, and legislation to regulate it was passed through Federal Parliament with the support of all political parties.  

NRAS is a new investment program for Australia, and based on the US experience, will take a number of years to fully develop. The Australian Government is committed to working with State and Territory governments, the business sector and not for profit housing organisations to ensure the Scheme's success.

NRAS is well underway to deliver against its target of 50,000 dwellings across Australia.

What is an NRAS Incentive

NRAS offers investors a substantial annual tax-free incentive, called the NRAS Incentive, which is payable per dwelling.

The Australian Government is committed to ensuring the full value of the NRAS Incentive is passed to investors, and encourages prospective investors to talk to the Australian Taxation Office (ATO) to ensure their investment vehicle achieves this.

The NRAS Incentive is a subsidy not available to standard residential property investors.

The NRAS Incentive is available to investors who agree to rent approved dwellings at a rate that is at least 20 per cent below prevailing market rates, to low and moderate income households.

Each approved dwelling attracts the NRAS Incentive for 10 years, so long as investors continue to comply with conditions relating to tenant eligibility and rent levels.

The Australian Government has no legal or equitable claim over the property. NRAS investors can therefore expect to benefit from the annual NRAS Incentive, rental yields and capital gain.

Current Incentive

The NRAS Incentive is currently $9,981 per dwelling, and is indexed each year to the rental component of the CPI.

The Incentive comprises:

  • an Australian Government contribution of $7,486 per dwelling per year (paid as a refundable tax offset or payment); and
  • a State or Territory Government contribution of $2,495 per dwelling per year (in direct or in-kind financial support).

NRAS offers great flexibility, with investors encouraged to develop portfolios with diverse dwelling types across different locations. With more than 1.5 million households eligible to rent NRAS properties, the vacancy risk in any location is negligible.

From an investment perspective, NRAS can counterbalance the risk and volatility of equity markets and assist in providing a balanced portfolio.

Financial modelling of the NRAS Incentive shows that it can provide rates of return at levels that are highly competitive with other asset classes.

What types of investors participate in NRAS?  

NRAS investors range from institutional investors and property developers to not for profit housing providers and individual investors. Consortiums and non entity joint ventures are common models under NRAS.

Lenders can participate in the Scheme through:

  • retail loans (loans to individuals);
  • loans to developers for individual projects;
  • loans to institutional investors, potentially across different developments; and
  • loans to not for profit housing organisations.

Retail applications will typically come from household investors in the same way as regular investment housing loans. Retail loan applications are only likely to be made for homes marketed by an NRAS consortium, who often already have NRAS Incentives allocated by the Government.

Not for profit housing providers may also seek debt finance to participate in NRAS, relying on the NRAS Incentive as an income stream. Not for profit housing providers are currently regulated by States and Territories. The Commonwealth is planning to create a national system of regulation for not for profit housing organisations.

Builders and developers may be including NRAS properties in future developments for which they are seeking project finance. Developers may be planning to on-sell properties to approved NRAS providers, counting these properties as effective pre sales. Where this is the case, developers could give lenders information about their NRAS partner(s), giving lenders a clear line of sight to the investor.

The Australian Government encourages innovation under NRAS - investors are expected to develop partnership arrangements that best suit them.

The Government does not recommend or require a ''head lease", or any other delivery model for NRAS - the appropriate entity structure or investment vehicle is a matter for potential debt and equity investors to negotiate together.

Most entities who apply to the Australian Government for NRAS Incentives are consortiums comprising investors, property developers and tenant managers.

Why lend for residential property rather than commercial property? 

Many developers and investors see the opportunity for good returns on a low-risk investment, and are keen to invest in NRAS using the most appropriate structure, including debt.

The Australian Government recognises that financial institutions will carefully examine any loan application for NRAS properties based on the particular project proposal, conditions, surety and the ability of the applicant to service the loan.

As with any large scale investment or emerging asset class, financial institutions should work with APRA to ensure that the prudential standard against which NRAS loans are assessed are appropriate and understood.

The Australian Government supports mixed NRAS developments owned by different parties. A debt portfolio of NRAS properties is arguably less risky than an average loan to an individual property investor, or to a commercial property developer, because the properties are often spread across different developments, and have strong demand by tenants.

Property and tenant management 

NRAS investors must appoint a tenancy and/or property manager. There are a range of services that need to be conducted, from the selection of tenants and periodic assessment of their ongoing eligibility to rent an NRAS property to general property maintenance.

A tenancy manager can be contracted on a fee-for-service basis by an investor, or be part of the consortium which applies for NRAS Incentives.

Standard State and Territory residential tenancy laws apply to NRAS properties just as they do for any private residential investment. This includes laws applying to registration and licensing requirements for tenant managers.

NRAS tenants will have normal leases under State and Territory tenancy laws. The same rules regarding evictions, maintenance obligations and responsibilities of tenants apply to NRAS tenants as they do to other tenants in the private market.

Tenants for NRAS properties are chosen by investors or their appointed tenancy managers.

The only requirement imposed by the Government relating to NRAS tenant selection is that they meet a household income test.

Income levels for eligible NRAS tenants are generous, and allow for salary increases of 25 per cent above the entry income limit.

If an investor decides to sell an NRAS property, there are many options for tenants. Many tenants who have lived in an NRAS property for some years will no longer require the assistance NRAS offers and will be either renting on the open market or have purchased their own home.

Some consortiums will want to retain NRAS properties after the expiry of the 10 year NRAS period, and keep tenants on without the obligation of offering discounted rent. Other tenants will be on the books of not for profit housing providers, who may wish to purchase the property or assist in transitioning tenants.

Additional facts about NRAS

  • NRAS dwellings are private property. No Government has caveats or claims over NRAS properties.
  • Standard procedures should apply for loan defaults on NRAS properties. As with any residential property, lenders would seek to manage the relationship with the investor in advance of defaults, negotiate a repayment schedule and, if necessary, sell the asset/s.
  • NRAS homes are often 'bundled' with non-NRAS properties - that is, private properties subject to an NRAS Incentive may form a part of a new multi-storey development, with the other non-NRAS properties sold off-the-plan to homebuyers.
  • An offer of NRAS Incentive can help with pre-sales figures.
  • NRAS dwellings can be sold without penalty during the 10 year period for which an NRAS Incentive is payable:
    • a dwelling can be sold to another investor who gives a contractual undertaking to comply with NRAS obligations; or
    • an equivalent dwelling can be offered as a substitute dwelling for the remaining part of the 10-year period, with approval from the Australian Government.
  • At the end of the 10 year NRAS period, investors have the discretion to do what they want with their properties. They could sell any or all of the properties, or retain them and revert to market rents.
  • The Australian Government has made a 10 year commitment to NRAS. The Scheme is managed and regulated under the legislative framework provided through the National Rental Affordability Scheme Act 2008.

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